Treasury yield curve steepens after solid auction

NEW YORK (MarketWatch) — Treasury prices were mixed on Tuesday as yields on longer-maturities rose and shorter maturities fell after a well-bid auction of 3-year notes.

The 10-year note
US:10_YEAR
yield, which moves inversely to price, rose slightly on the day to 2.639%, according to FactSet.

The 30-year bond yield
US:30_YEAR
rose 1 basis point to 3.644%, and the 3-year yield
US:3_YEAR
fell half a basis point to 0.678%.

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The growing differential between shorter and longer-term Treasurys, known as a steepening yield curve, marks a correction in the market as the curve flattened during the last few sessions.

The yield movement comes after the Treasury Department sold $32 billion in 3-year notes. Investors are looking at this week’s sales for signs Treasury yields are stabilizing after soaring since the beginning of May.

The 3-year note now yields more than twice as much as its 2013 closing low of 0.295%, hit May 2. On Tuesday, the notes sold at a yield of 0.719%, the highest sale price since June 2011.

Buyers offered to buy 3.35 times as much debt as was for sale, more than the 2.95 cover recorded last month but below the 2.50 average during the last year.

Indirect bidders, which can include foreign central banks, took down 35.6%, well above the recent average of 26.8% during the previous year. Recent auctions of other maturities have seen similarly strong indirect bids. Direct bidders, which can include domestic money managers, bought 13.0%, below the average of 18.1%.

Overall, the auction had the largest take-down from non-dealers since the beginning of the year, helping it garner a grade of A- from Nomura Securities.

“I think it just shows that there are definitely value buyers out there,” said Jeffrey Young, a U.S. rates strategist at Nomura Securities. “If this market gets too high people will step in to start buying.”

While the 3-year auction had substantial demand considering the recent selloff in the market, the sale of $21 billion in 10-year notes on Wednesday and $13 billion in 30-year bonds on Thursday may be a greater test of whether buyers are returning to the market.

“The 3-year isn't that good a bellwether, but 10s and 30s could be interesting,” said Michael Schumacher, head of global rates strategy at UBS.

Prices have fallen, sending yields higher, across the bond markets over the last two months as investors adjust to expectations that the Federal Reserve will inch its way out of its easy-money policies, which have held yields down through monthly bond purchases.

“Whenever a market moves a lot, investors, traders, and strategists tend to get a bit skittish. I’m not so convinced people will add duration,” said Schumacher.

A stronger-than-expected monthly jobs report last Friday sent Treasury yields spiking as it reaffirmed expectations the Fed will announce a wind-down, or tapering, of its purchases in September. Fed Chairman Ben Bernanke has said tapering could begin later this year if data continue to show U.S. economic improvement.

Treasury yields walked back some of their rise on Monday, as the market found buyers after the selloff. But continued volatility is expected as the pricing in the market continues to be driven by the Fed’s potential policy changes.

More clues on the Fed’s plans may come on Wednesday when the Federal Open Market Committee releases the minutes of its last meeting and Bernanke makes a public appearance.

“The big trade in the market is you want to be long volatility in some shape or form,” said Schumacher.

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